While no one can predict with certainty what's next for the economy, or interest rates, or the stock market, it is still possible to get an idea of what might be coming. Mortgage interest rate trends, while they can't be exactly pinpointed, can still be identified. Here is a breakdown of some of the factors that influence mortgage interest rate trends:
10-Year Treasury Yield
Treasury bonds often hold clues about what's happening in the economy. Treasury bonds are also considered among the safest investments in the world. When consumers feel confident and the economy is growing, the need for safety is lower. Rather than invest in bonds, they turn to stocks for the potential gains. As a result, bond prices drop and their yields -- the interest paid to investors -- rise to attract more investors. When people are scared, they look for "safe" investments like Treasuries. When demand is higher prices rise, sending yields lower. (With bonds, price and yield move opposite to each other. When a price is higher, the return on a bond is lower.) Mortgage rates often follow the 10-year Treasury bond yield because it offers insight into the long-term trends of the economy. When the yield on the Treasury goes up, mortgage interest rate trends generally follow.
Inflation is an increase in prices or a reduction in buying power. Over time, prices rise. What you can buy with one dollar is much less today than what you could buy with a dollar 20 years ago. Lenders can see their real profits eroded by inflation, just as you see that your money doesn't buy as many groceries as it used to. In order to offset the impact of inflation, lenders often raise their mortgage rates.
The Federal Reserve
The Federal Reserve System is the central authority in banking. The Federal Reserve sets benchmark interest rates and determines money supply. The Federal Reserve can increase the amount of money in circulation by purchasing Treasuries from large banks and others. Now, instead of having money tied up in bonds, these banks have cash that can be used to make loans to consumers. As the money supply increases, interest rates go down. The Fed often uses monetary policy to boost the economy. However, after the money has circulated for a while, prices can start to rise because of the presence of easy money and the ability of consumers to handle higher prices. When the Fed is ready to reduce inflation, it sells its Treasuries, restricting money supply and resulting in higher interest rates.
Housing Market Demand
Supply and demand are at work on the mortgage market. When people want to buy homes, there is high demand. This pushes up the prices of homes. It also means that lenders can charge higher interest rates since they don't have to work as hard to attract buyers. At times when there is low demand for home buying, mortgage rates drop. Part of making homeownership attractive is lowering mortgage rates so that buyers feel they can afford homes.
Economy and Confidence
Housing market demand depends, in part, on what's happening with the economy. When the economy is growing and people are earning higher incomes, they are more willing buy homes. With more people feeling confident enough to buy homes for the first time, or to "upgrade" to bigger homes, the demand in the housing market grows. As this demand grows, lenders can increase their rates. On the other hand, when the economy does poorly, many consumers move away from home buying. Instead of buying a bigger house, a family might stay put. Would-be first-time homebuyers put off their purchases until they feel more confident. Mortgage interest rates trends then head lower in an effort to lure homebuyers.
As you can see, many of these items are connected. Mortgage interest rate trends are impacted by a number of factors locally and nationally. If you pay attention, you can get an idea of which way rates are likely to move in the future and plan to buy or refinance before rates rise too quickly.